A Look At Yellen's (Nonsensical) Claim That Fed Is "Focused On Main Street"

In case you missed it...

In an exclusive interview with Time magazine, Fed head Janet Yellen said:

"We are focused on Main Street, on supporting economic conditions—plentiful jobs and stable prices—that help all Americans."

We've been arguing that Fed policies have, in fact, perpetuated the exact opposite of Yellen's stated goal for some time now. In the charts below, via Hedgeye Senior Macro analyst Darius Dale, you can clearly see the massive build in asset prices that Fed helped create. This swelling of financial assets flowed predominantly to the balance sheets of the wealthy. Not Main Street.

As Darius Dale wrote earlier today:

"This grand central planning experiment where we've made literal market-moving rock stars out of government bureaucrats will definitely come to an end."

More on that...

Yellen & Co. have this nonsensical line of thinking that the Fed "did not make a mistake" with its December rate hike, a pause in April rate hikes was warranted because the Fed is "willing to be cautious" about poor economic data but that, ultimately, the economy is doing "quite well" so further Fed rate hikes is one of the world's "worst-kept" secrets.

Click the images below to enlarge:

RH | Great Deal, Great Read-Thru

Takeaway:A fantastic deal that gets RH what it can’t build on its own without multiple times the capital spend.

This RH acquisition makes all the sense in the world to us – not because we’re bullish on all things Resto. We’re not, actually. But we do think that the current valuation egregiously misses the mark in capturing the real economic value that RH will deliver in the coming years. Here’s a few points…

I (McGough...and probably Richards too) saw the press release that ‘RH acquires Waterworks’ and I nearly had a coronary. Why should a company that is going through such uncharacteristically ugly growing pains in the front end (changing its promotional strategy) and the back end (vendor realignment) be doing a deal? Is it to buy earnings growth that otherwise does not exist? To deflect investors’ attention from a core strategy that might have taken a turn for the worse?

The answers are No and No. This is a very good deal for RH. Waterworks is one of the few premium Kitchen hardware companies in the business, and in 2014 it launched its own custom cabinet business. Remember how RH talked two years back about how big an opportunity Kitchens was? Then it got quieter as each quarter passed as it realized the sheer complexity with creating a brand and presence in that business. Then Richard Harvey resigned last summer, after having been plucked from Williams-Sonoma to run Kitchens at RH. Now this deal immediately gives RH a retail presence as well as an imbedded vendor network throughout Europe.

WW also has a very strong presence with the trade. RH, does not. We hate to hear about ‘cross selling’ opportunities with acquisitions, because we’ve very rarely seen them play out. But this one seems like a no-brainer to us.

Most importantly, we actually think that this deal is a big tell about the state of RH’s business today. If the company was concerned about its trajectory in the launch of Grey Card or in realigning its vendor network, we don’t think it would go within striking distance of any form of M&A. Ultimately we think it is bullish.

Similarly, cash flow is always a major concern for people. But we think that RH would only use the $117MM in cash to buy this brand if it would actually reaccelerate its cash flow goals as 2019/20 loom on the (very distant) horizon.

Additional details…

1) What is it? – Waterworks annual revenues are in the $100mm+ ballpark, with 15 showrooms across the country in key MSA’s: NY, LA, Miami, Chicago, Boston, UK etc. Along with that comes an established Trade business, with the product featured in 50 hotel projects and 45 apartment complexes with a particular emphasis in NY. The brand’s heritage is rooted in Bath and opened its first Kitchen showroom in August of 2014. The product offering is additive on the Bath side to RH’s current offering with a broader selection of technical fixtures. And the Kitchen business is a mirror image of the line RH had talked about creating when it hired Richard Harvey (who is no longer with the company) in June of 2013. The current offering includes: cabinetry, sinks, fittings, surfaces, etc.

2) Deal economics: The $117mm all-cash deal, implies multiples of 1.1x-1.2x sales and 10.5x EBITDA. Slight premiums to where RH is trading, but our sense is that RH has been courting partners that make strategic sense to fill out the category breadth since it closed its first convert in the early part of 2014. The timing here suggests that RH did what it said it would do all along, by taking advantage of market volatility to bolt on strategic partners to broaden the category assortment at a price that makes financial sense.

3) Year 1 accretion: That way we are doing the math, assuming it’s a ~$100-$120mm business, with HSD operating margins (DD EBITDA) closing in 2Q, we get to 3%-4% points of top line growth ($60mm-$75mm in revenue). At a HSD EBIT margin that’s 2%-3% points of EBIT growth, and $0.05 in earnings.

Waterworks product offering:

Kitchens

Bath

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04/13/16 09:55 AM EDT

INSTANT INSIGHT | What's Really Driving Oil Prices

Following yesterday's 4.5% pop in the price of oil on OPEC production freeze speculation, we're back to fundamentals this morning (a.k.a. stronger U.S. dollar pushing prices lower).

So where do we go from here? Below is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

"Another fun ramp to an immediate-term overbought signal (on an oversold USD signal) finds resistance, USD bounces, and Oil sells off -1.7% this am; OVX (oil volatility) is signaling nowhere near the end of this bear market in Oil (OVX = 48 with an immediate-term risk range of 44-53)"

In a recent Early Look, McCullough noted that Commodities (CRB Index) have an inverse correlation (30-day duration) of -0.88 vs. the US Dollar. That's what's driving commodity prices and oil today.

If you are trying to read the OPEC tea leaves, however, watch our Hedgeye colleague and Potomac Research Group's Senior Energy analyst Joe McMonigle in the video below.

Today, Saudi Arabia's Oil Minister downplayed the prospect of oil producers taking action saying "Forget about this topic." Furthermore, Iranian oil minister Bijan Zanganeh announced that he does not even plan to attend the Doha meeting.

Sound familiar?

McMonigle has been arguing for a while now that speculation about an OPEC oil production freeze is just talk, since Saudia Arabia and Iran's true intentions are what really matter. Here are links to other videos and research notes via McMonigle:

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Takeaway:JPMorgan (JPM) still has extremely bullish sentiment according to our quantitative screen of Financials.

This morning we're flagging JPMorgan, Bank of America, and Citigroup (Scores: 94) as shorts on sentiment. All three bulge bracket/money center banks have the highest sell side ratings combined with low levels of short interest which historically have made them underperformers according to our score.

We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors.

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations. Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations. Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms.

Takeaway:All five active equity categories continued to lose funds last week; total eq MF flow came to -$4.9 B. Meanwhile passive equity took +$2.0 B

Editor's Note: This is a complimentary research note originally published April 7, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

* * * *

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The landscape between passive ETFs and mutual funds in fixed income is starting to look a lot like the landscape in equities. An inflection point is now evident in the growth rate of passive bond products versus funds starting in 3Q15 with fixed income ETFs growing through the volatility in credit and now cumulatively ahead of running net new assets in funds. The entire equity complex has shifted toward passive products for some time now making the chart below a future look at how the pie will shift in fixed income.

Specifically during the week, the latest ICI survey again relayed this migration for the five-days ending March 30th; all five equity mutual fund categories experienced withdrawals, bringing the total equity mutual fund flow to -$4.9 billion. Meanwhile, passive equity ETFs took in +$2.0 billion.

In fixed income, taxable bond funds experienced a -$195 million outflow as investors continue to prefer tax-free municipal bonds, which took in +$1.4 billion last week.

In the most recent 5-day period ending March 30th, total equity mutual funds put up net outflows of -$4.9 billion, trailing the year-to-date weekly average outflow of -$798 million and the 2015 average outflow of -$1.6 billion.

Fixed income mutual funds put up net inflows of +$1.2 billion, outpacing the year-to-date weekly average inflow of +$1.1 billion and the 2015 average outflow of -$475 million.

Equity ETFs had net subscriptions of +$2.0 billion, outpacing the year-to-date weekly average outflow of -$1.6 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$258 million, trailing the year-to-date weekly average inflow of +$2.1 billion and the 2015 average inflow of +$1.0 billion.

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the long treasury TLT ETF experienced a -$415 million or -4% outflow, although it has experienced the largest inflow YTD on a percentage basis of +48%.

Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$4.4 billion spread for the week (-$2.9 billion of total equity outflow net of the +$1.5 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$422 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

B) But, on shorter-term durations, consensus is right back in the saddle now, Short USD and Long Oil

C) And this is happening as both the Long-term support for USD is holding inasmuch as long-term resistance for Oil is

So… in addition to keeping shorts on (in Real-Time Alerts) where Earnings Season is our catalyst, maybe what I should do is just buy Dollars, short Oil & Gas Stocks (XOP), turn off my screens for a week…"

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